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What is a Buy Stop Order?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 16 November 2016
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    Conjecture Corporation
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Buy stop orders are an example of a means of entering a purchase request for a security that comes with the stipulation that the request be held until the current market price for the security is equal to the stop price for the asset. Buy orders of this type are usually employed when market trends indicate that the market price for some sort of security is about to enter into a period of increasing in value. Essentially, a buy stop order is a strategy that allows an investor to secure an asset when and if the market price begins to rise, without the need to constantly monitor the activity of the security.

As part of the process of entering a buy stop order, an investor will often go over the proposed market order with his or her broker. As part of the investigation into the feasibility of creating a buy order of this type, the investor and the broker will look at the past performance of the security in question. This detail will be evaluated in light of the current conditions that provide insight into market indicators of the day and how those indicators may or may not influence the future price of the security.

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Applying this approach, it is possible to ascertain if placing a buy stop order on a given security has a good chance of yielding a good return on the investment. At the same time, it is also possible to get a good idea of how long it may take to reach a point where the market price rises to that of the current stock price, and how much more the security is likely to rise after the order is executed.

One advantage of a buy stop order is that there is a relatively small amount of risk associated with the transaction. Since the market price has to rise to a certain level before the broker executes the buy stop order, the only chance of losing money on the venture is if the security reaches the stop price and then begins to drop immediately after the security is acquired. Generally, an investor would have some time to note that the security is no longer climbing in price, and be able to sell the security at no more than a small loss.

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